Foundry Business to Come Back Down to Earth

The foundry business has long been the quiet component of the scrap metal industry. Not as explosive as the electric arc furnace business, which grabs a sizable chunk of the ferrous scrap business, nor as large as the basic oxygen furnace steel mill segment, ferrous foundries often get lost in the shuffle when dealing with end markets.

And, with typical foundries at a much smaller scale than other scrap consumers, it is even easier to lose perspective on the role that this segment plays. According to Mike Lessiter, editor of Modern Castings, a magazine produced by the American Foundrymen’s Society, Des Plaines, Ill., there are a total of around 3,000 foundries in the United States. Of these, between 1,000 and 1,100 are ferrous foundries.

While large in number, their melt capacity, typically, is far less than that of an electric arc furnace (EAF). While foundries can range in size from several tons a day up to several thousand tons, an average size ferrous foundry may have a daily capacity of around 100 tons.

SCRAP DEMANDS

The estimated amount of scrap consumed by foundries is much less than that of EAFs. According to Gene Muratore, with Rio Tinto Iron & Titanium, a producer of high purity energy units for the ductile iron industry, located in Rosemont, Ill., of the between 70 and 80 million tons of ferrous scrap that were consumed last year, only around ten million tons were consumed by ferrous foundries.

While only a minority portion, foundry business plays a key role for many scrap processors. While larger operations may seek out large commitments with a winner take all approach, foundries often require much smaller amounts, but require a steady shipment of the material. And, with the growth of huge scrap processing facilities, the continued operation of the ferrous foundries allows many smaller operators, often with single yards, to continue shipping their material.

Bob Brewer, head of foundry sales for Omnisource Corp., Fort Wayne, Ind., notes that most foundries have limited storage space. This requires the operation to buy material on a steadier basis. Once the foundry finds a consistent grade they tend to work very closely with that supplier.

Tim Ford, vice president of  Benton Foundry, a ferrous foundry based in Benton, Pa., sees the volume of material as an advantage for scrap processors. “The steadiness of the purchases is an advantage.”

With smaller, but steadier purchases, Ford continues, there aren’t the “wild” price swings seen with electric arc furnaces. On the other hand, EAFs and integrated steel mills, which may buy thousands of tons of scrap at a time, may opt to buy heavy when prices are low and store the material, and then buy sparingly when prices climb. “Foundries don’t like changes,” Brewer adds. “Loyalty is developed.”

The need for a steady flow of material also mandates that a large chunk of the ferrous scrap being shipped to foundries moves by truck. Moving ferrous scrap by railcar often requires greater attention to the logistics side. Railcars filled with ferrous scrap run the risk of winding up backed up for days on end, and may not be at a site for days later than expected. For foundries running much closer to just-in-time, this means a steadier flow of material is needed.

COMPETITION FIERCE

The steep slide in price for low residual steel scrap, which brought the prices down significantly since the second half of last year, has been a major boon for many foundries. While other consumers of ferrous scrap (notably EAFs) had made attempts at using scrap substitutes and direct reduced iron to keep scrap prices from overheating, foundries are more dependent on a sizable amount of scrap to run their operations. When prices skyrocket, foundries have few options, other than the increased use of some pig iron, along with their own self-generated scrap that is left over in the casting process.

While competing with EAFs on one side, foundries have to keep one eye on the offshore business, both for increased exports of desirable low residual scrap as well as the import of steel castings. According to Muratore, most manhole covers located west of the Mississippi River are produced not in the United States, but rather in countries such as Mexico, Brazil and Korea, among others.

A NEIGHBORHOOD FEEL

Competition is fierce for the ferrous scrap needed by both EAFs and foundries. One advantage many foundries hold is their ability to compete at the local level. While larger consumers will pull from a radius of hundreds of miles, foundries often focus on working with a handful of suppliers within a close geographical region. This approach often allows for greater flexibility between the two sides in regards to quality, size, price, and delivery dates.

The basic requirements for foundries also call for a closer relationship between supplier and consumer. Although some foundries have built larger cupolas allowing them to handle larger size loads, most foundries require smaller sized loads of scrap. This requires increased processing by scrap dealers, translating into a typical higher front-end cost.  While it becomes more expensive on the front end, the result is a higher price that needs to be paid by the foundry.

Additionally, most foundries require a cleaner grade of scrap than EAFs, which may be more forgiving of tramp materials.

While foundries have always sought consistency, there has been an overall trend toward a cleaner grade of scrap. Over the past several years, more foundries are seeking to develop a load requirement that continues to be cleaner. Because foundry scrap loads are delivered in much smaller volumes, it is easier to monitor the type of material delivered. Further, Brewer points out, because a foundry will use the scrap right away, they can get a better indication of who has been shipping tolerable scrap and who has not.

In comparison, an electric arc furnace may not get to a delivered scrap load for months. By that time it may be more difficult to determine where any problems with a load originated.

FUTURE IFFY

Foundries will continue to play an active role in steel consumption. In the ferrous segment of the foundry business, gray iron continues to be the largest component, with an estimated six million tons produced last year. Following that is ductile iron, with roughly 4.2 million tons produced; and finally steel, which posted 1.6 million tons produced.

However, there are trends developing that are changing future demands and operations. According to Muratore, production of gray iron, while stable, could be in for some difficulties over the next several years. One of the biggest end markets for gray iron is the automotive industry. This segment, as of late, has been attempting to increase fuel efficiency. The translation: greater use of aluminum for core parts such as engine blocks, etc. This move is coming at the expense of gray iron.

Indicative of the flattening trend, several larger foundries have scaled back their operations, or even switched to non-ferrous foundry operations. One such notable move was made at General Motors’ Defiance, Ohio, ferrous foundry.

Ford also sees a rocky future for foundries. “We are going in a downward cycle. We are seeing a consolidation of foundries by larger operators.” Further, he adds that it is likely that more foundries will fail. He also points to concern over the weakening of the gray iron segment of the business. With more automobiles moving toward lighter, non-ferrous metal for many of the internal parts, demand for gray iron will lessen.

While this may be looked at as a negative, Omnisource’s Brewer sees some optimism with the move. He points out that while GM may have closed its operation, other, independent foundries were able to pick up the demand. The result is other foundries were able to increase their capacity or otherwise expand their operation for new business.

According to Lessiter, while gray iron demand has been fairly stable, without the increased production of automobiles (including from foreign car manufacturers such as Honda) being built in the United States, the gray iron business would be in much more difficult situation.

While gray iron production is an area of great concern, ductile iron shows the best promise. The flexibility of the material is allowing gray iron to continue to see growth as a larger component of automobiles. Additionally, with the continued improvement in steel pipes, there will be further increases in demand, which should help foundries geared to supply the material. According to Lessiter, “Ductile iron is showing nice growth patterns. It is used for all kinds of applications.”

Ford agrees. Ductile iron, due to its flexibility, will continue to be a popular item for many foundries.

Foundry steel has shown some recent strength of late. Lessiter attributes much of the strength to the increase in railcar demand. The railroad industry, after several years of shortages, sharply increased their purchases of new railcars. However, this buying spurt is expected to slow, and the steel used for them is expected to stabilize.

A REAL WILDCARD

The U.S. economy has, so far, weathered many of the problems affecting parts of Asia and Brazil. Domestic consumption is strong, helping the auto and housing industries.

The flip side to this is that more finished steel has been “dumped” into the United States. While the foundry business has escaped most of these problems thus far, there are concerns that imports of castings from Mexico, South America and Asia could increase into the United States, putting downward pressure on the foundry business.

While this has yet to take hold, the benefit of the strong dollar and inexpensive freight rates has allowed some foundries to export more material, especially to Europe. According to Murtrare, it is less expensive to make some steel castings in Texas and ship them to England than it is to make the same product in England. The advantage has allowed some foundries to flourish.

Another positive for foundries has come at the expense of scrap processors. With more steel being imported, domestic steel mills are slowing their production schedules. The result has been less ferrous scrap being consumed by mills, resulting in sinking prices. According to one analyst, some grades of ferrous scrap have dropped by as much as 50%. And, because foundries rely heavily on scrap as a raw material, lower scrap metal prices are a boon to foundries.

A promising sign for the future of the foundry business is the growing reliance both parties have with each other. “Foundries are working more closely with suppliers. There is true teaming taking place,” according to Brewer. Metallurgical people are talking with suppliers to find the best grade of material for the foundry. Consistency may be a key for suppliers. However, each ferrous foundry may have slight variations in the type of acceptable material. Many figures affect what can and cannot be taken in. 

Because of the close working relationship between the two sides, quite often the foundry can offer suggestions to improve the success of the scrap yard.

However, Ford sees markets forcing more foundries out of business. At the same time, the pool of skilled management to operate foundries is declining, making it even more difficult to remain competitive.

Changes in market conditions are typically reflected in the activities of the large scrap consumers. With attention toward the growing role of EAFs, foundries are often a forgotten component of the scrap ferrous industry. But, with their heavy reliance on scrap, as well as their need to forage close working relationships, this segment will continue to play a pivotal role in the scrap industry’s comeback.  This, despite the fact that in volume terms, the foundry business will remain a distant second to steel mills as a consumer of ferrous scrap.

The author is senior editor of Recycling Today.